both investors in a country with low time-preference since they will have a higher return and benefit companies in a country with a higher time preference since they can invest more.

The fact that the risk free interest rate is equal in all countries is sometimes held to be a big negative thing about monetary unions. According to this Keynesian logic, supposedly a country with a weaker economy should have lower interest rates to boost its economy. Yet whatever one may think about this from business cycle point of view, this constitutes a violation of the principle of free competition and should in fact be seen as a form of state subsidy. To understand why this is, assume that in a certain country, the economy of a certain region is weaker than other regions. This is hardly an unrealistic scenario, as there are many concrete examples of this, for example in Sweden, the northern part of the country, in Italy the southern part of the country and in Belgium the French-speaking parts of the country. If the governments of any of those countries declared that the businesses and households in the weaker parts of the country should pay lower interest rates, then they would have to subsidize these loans, as lenders are unlikely to agree to charge people in economically weaker regions lower interest rates (indeed due to the higher risk of default, they will charge them more). Thus, having lower interest rates for business in weaker regions or countries in effect constitute a state subsidy for them, something which distorts competition.

Similarly, another supposed advantage of separate currencies according to Keynesian business cycle logic, is that currencies of weaker countries will fall22, which will bring businesses in those regions a competitive advantage. Yet this competitive advantage will in fact be a form of subsidy for businesses (though certainly not for households) in that country. To understand why this is the case, let’s again consider the case of a weaker region within a country. Suppose that the government of that country had decided that in order to make businesses in that region more competitive, the government will subsidize products made in that region that are sold in other

22 In practice, it is not always the case that weaker economies have the weakest currencies, as is illustrated by the strength of the U.S. dollar and the Japanese yen during the second half of 2008, despite weakness of both the U.S. and Japanese economy. But this issue is not relevant to the more important issue that exchange rate fluctuations will result in de facto subsidies for certain industries in certain countries.